Why would you buy a new home?

There are upsides to new construction, if you can stomach the price

CHICAGO (MarketWatch) — Given the bloated supply of existing homes for sale, including a glut of foreclosures, there aren’t many people willing to shell out a premium price for a newly built house.

New-home sales dropped to a seasonally adjusted annualized rate of 295,000 in August, down from 323,000 for all of last year, and a far cry from 2005, when 1.28 million new homes were sold, according to the Census Bureau and the Department of Housing and Urban Development. Read more: Sales of new U.S. homes dip in August.

Luxury golf communities' home values are falling, done in by rampant
overdevelopment, the economic downturn and waning interest in the sport. Photo: Zachary Bennett, Wall Street Journal.
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Despite a likely higher price tag, a home builder will say that you’re buying a better product when you buy new. For one, it’s a home designed for the way Americans live today, maximizing the usability of space and offering amenities that speak to modern needs, such as big closets. Plus, new homes are built to be more energy efficient.

“It’s appealing to people who are concerned about energy costs in the future and the longer-term efficiency of the home,” said John K. McIlwain, senior resident fellow for the Urban Land Institute, a research organization focused on land-use and real-estate issues.

“There’s also the advantage that if you buy a home today, that has energy features that will be worth more down the road, when the market recovers,” he said.

When buying new, there aren’t the questions of deferred maintenance that can come along with existing — and especially distressed — properties that have lingered on the market for a long time, said Stephen Melman, director of economic services for the National Association of Home Builders, a trade group for the home-building industry. “In general, anything that sits there has to be in worse shape,” he said.

And let’s face it: Some people covet new homes simply for their “newness.”

Buying new “has become a deep part of American culture,” McIlwain said. “We built an economy around having to replace everything every two to three years. Think of Apple: It is built on the basis that they have a new toy out for us every year or two.”

But when it comes to home buying, “new” has become a much harder sell.

New is old

The most obvious reason home buyers aren’t walking through builders’ model homes these days is the price.

The median sales price of a new home sold in August was $209,100, according to the Census Bureau and the Department of Housing and Urban Development. The median price of an existing home was $168,300 in August, according to the National Association of Realtors, an industry trade group. Read more: Sales of existing homes surge.

On top of that, there are horror stories of new-home buyers who hit a speed bump when the appraisal is done. “Low appraisals are a disaster,” Melman said, adding that some builders are complaining of appraisals that come in lower than the cost of construction. When the appraisal comes back low, that reopens negotiations and could require a buyer to put more cash down, he said.

From an appraiser’s standpoint, valuing a new home can be a challenge, said Sara W. Stephens, president-elect of the Appraisal Institute, a professional association for real-estate appraisers. When there aren’t a lot of new homes selling in an area, appraisers are forced to look at the most similar sale they can find, she said.

Then there’s the worry about construction quality, when builders are doing whatever they can to stay afloat.

“These guys had to downsize and cut back and are operating on paper-thin margins and carrying too much debt, and they’re trying to drop the price as much as they can to get into the market,” McIlwain said. “So you could argue that they might be cutting every corner that they can.”

Smart shopping

That said, builders are making efforts to be competitive. Many are reducing floor plans and lot sizes to shrink the price of the home, McIlwain said. In some cases, builders offer incentives to sweeten a deal. And they typically stand by their craftsmanship through warranties.

There also has been more emphasis on infill construction within cities, as opposed to the distant suburban developments characteristic of the housing boom — important at a time when $4-a-gallon gas has consumers interested in shortening their work commutes, Melman said.

If you are in the market for a new home, research the builder, including what people are saying about the company online and whether any lawsuits have been filed against it, McIlwain said. Ask questions about the quality of the materials as well.

Get a home inspection and a radon test to make sure you’re getting an independent analysis of the construction quality and the indoor environment, said Kurt Salomon, president of the American Society of Home Inspectors, a trade group for home inspectors.

To avoid appraisal problems, Stephens said the seller or buyer should walk through the home with the appraiser, pointing out any special features of the home. Point out comparables as well as distinguish whether a property nearby was a distressed sale — offering as much information as possible about the pressures the seller was under, she said. And ask questions about the appraiser, including where they’re based and how experienced they are.

“If the appraisal comes back and it’s low, you can always ask for a second appraisal,” Stephens said. Read a copy of the appraisal, review the comparables that were used, and voice concerns you have about the report, she said.

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